Friday’s data suggested that the US economy remains resilient. For now, there is no reason for the Fed to support demand. The labor market added 199,000 jobs in November, up from 150,000 in October (the previous two months were revised down by 35,000). Consumer survey data was very strong. The unemployment rate fell from 3.9% to 3.7% as job growth outpaced a strong increase in the labor force. Average hourly earnings remained solid at 0.4% m/m and 4.0% y/y. Later, the U. of Michigan’s consumer confidence even painted a “perfect world” scenario.
Sentiment jumped sharply from 61.3 to 69.4 as consumers’ assessment of both current conditions and expectations improved. At the same time, consumers see inflation easing. Expectations for the next 12 months fell from 4.5% to 3.1%. Expectations for the next 5-10 years fell from 3.2% to 2.8%. This should give the Fed some comfort. Still, the overall data was strong enough for markets not to anticipate further aggressive Fed easing next year. US yields rose between 12.6 bps (2-y) and 4.8 bps (30-y). Markets reduced bets on a March Fed rate cut to <50% (from 70% before the release). The pricing pattern in the US bond markets was copied in Europe, with German yields rebounding between 9.7 bps (2-y) and 6.6 bps (30-y).
Hopes of a soft landing kept equities well bid, with US indices testing the 2023 highs (S&P 500 + 0.41%). The Eurostoxx 50 even closed at a post-corona high (+1.1%). The dollar jumped on the payrolls release, but without any follow-through gains. The DXY (close 104.01) failed to clear initial resistance at 104.23/56. EUR/USD spiked near 1.0725, but managed to limit the damage (close 1.0763). The rise in U.S. core yields also blocked the yen’s recent rise. The USD/JPY ended the Asian session at 144.95, off an intraday low of 142.5.
Asian stocks are mostly trading in the green this morning. Japan is outperforming. Chinese markets are a bit in doubt as price data points to continued deflation (cfr infra). Today’s eco calendar is empty. Markets are looking forward to tomorrow’s US CPI inflation for November ahead of several central bank decisions, including the Fed (Wednesday), the ECB and the BoE (Thursday).
In case of a soft US CPI, we will be looking to see if the recent lows in yields hold. With regard to the Fed and ECB meetings, the points/projections are key. We expect markets to see more than 50 bps of expected Fed cuts by the end of 2024 as a “confirmation” of recent positioning. The question is also how much the ECB will lower its expected inflation path for 2024 and 2025. A softer stance from both the Fed and the ECB could lead to a more balanced EUR/USD cross rate. In this scenario, the EUR/USD 1.065 area could gradually provide some support.
